“This broadly based metric supports the conclusion that the labour market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labour market conditions,” she said, reiterating the July FOMC statement, which explicitly aimed to downplay the ambiguous message of the falling unemployment rate.

“As of April (latest data), the Fed’s Labour Market Conditions Index (LMCI) was well above the levels seen at the start of the previous two Federal funds rate hiking cycles,” wrote Matus on Friday. “Indeed, history shows that Fed tightening started well before what LMCI lost in recession was recovered. In the last recession, the LMCI fall was unusually steep.”

Matus doesn’t appear to care for this index as an indicator of the labour market as Yellen sees it.

“Unfortunately, we find that the LCMI has a low correlation with both the labour force participation rate and with wages, two key areas of concern” for the Federal Reserve,” he said. On a 12-month period, the LMCI only had a 0.36 correlation with the labour force participation rate and a 0.38 correlation with average hourly earnings.

The big worry for Matus, and other more hawkish Fed watchers, is that the Yellen-Fed will misinterpret the labour market signals and maintain loose monetary policy for much longer than the economy needs.

“If the Fed’s highly stimulative policy cannot solve the unemployment problem now but keeps policy over easy for too long, it will be setting the stage for the labour market to tighten significantly,” he said. “As the labour market normalizes, wage (and inflation pressures more broadly) can accelerate more rapidly as lagged effects of the stimulative policy extend into the period where labour markets have re-normalized.”

With that comes unwanted levels of inflation.

Matus believes that the first rate hike will come in “mid-2015” with subsequent hikes accelerating at a pace faster than what the Fed currently projects.

“Indeed, Yellen notes that ‘if progress in the labour market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter,'” said Matus. “We believe that this will prove the case as the Fed’s efforts to stimulate the economy and boost the labour market overlap with the normalization of the labour market, resulting in a version of the scenario described above.”